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Century Casinos, Inc. (NASDAQ:CNTY)

Q4 2013 Earnings Conference Call

March 31, 2014 10:00 AM ET

Executives

Peter Hoetzinger - President and Co-CEO

Erwin Haitzmann - Co-CEO

Margaret Stapleton - EVP, Finance

Analysts

Bryan Maher - Craig-Hallum Capital Group

Justin Ruissi - Sidoti

Operator

Welcome to Century Casinos' Q4 2013 Earnings Conference Call. This call will be recorded. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. I would like to introduce our host for today’s call, Mr. Peter Hoetzinger. Mr. Hoetzinger you may begin.

Peter Hoetzinger

Thank you, Orlando. Good morning everyone in North America and good afternoon to all our European listeners. I am happy to have all of you join us for this call following the release of our fourth quarter and year-end 2013 earnings. With me on the call today are Erwin Haitzmann, Co-CEO and Chairman of the Company and Margaret Stapleton, Executive Vice President of Finance.

Before we begin, I need to remind you that in our remarks today we will be discussing forward-looking information which involves a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. The Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. We provide a detailed discussion of the various risk factors in our SEC filings and we encourage you to review these filings.

In addition, throughout our call we may refer to several non-GAAP financial measures, including but not limited to adjusted EBITDA. Reconciliations of our non-GAAP performance and liquidity measures to the appropriate GAAP measures can be found in our news release and in the 10-K and 10-Q filings, all of which are available in the Investors section of our website at cnty.com.

In the fourth quarter of 2013 and effectively true for the entire second half of the year our business performed behind expectations, mostly because of unusual external challenges. The period-over-period increases of 66% in net operating revenue and 3% in adjusted EBITDA in the fourth quarter related primarily to the inclusion of operating results from Casinos Poland Limited, offset by softer business levels in Colorado in the later part of the year.

As you probably heard from others in the recent weeks, the period was quite challenging for casino operators in pretty much all regional in North American gaming markets, and we were certainly no exception to that trend. First we had the devastating floods in Colorado and Calgary in late summer, then the strong winter storms in the fourth quarter. But it's only the weather, there's also still significant economic uncertainty out there that is contributing to the reduced customer spending.

Before reviewing the results of each individual operation, I would like to summarize our venture casino spend today. During 2013 we made significant progress with the implementation of our strategy to increase shareholder value. Our share price increased from $ 2.81 to $5.21, that’s 85% in 2013. And in 2014, it’s up another 30% year-to-date already. Also, the average daily trading volume increased from about 35,000 shares to over 200,000 shares.

From an operational perspective, we diligently focused on refining and adjusting our products, our marketing, and our amenities. Sometimes that temporarily lowered the operating margins but its all part of an effort to enable us to deliver a competitive entertainment product to our customers in the years to come.

We also continue to keep clean and strong balance sheet, which as of December 31, 2013 showed $27 million in cash and cash equivalents. We now have $34 million in outstanding debt, which includes $6.5 million total debt of Casinos Poland of which we own two thirds; $18.3 million related to a long-term land lease for the Calgary Racetrack and Casino project that has been classified as financial debt and $9.3 million related to our Bank of Montréal credit agreement.

We successfully executed the strategy to increase shareholder value against the backdrop of ongoing uncertainty in the macroeconomic picture and consumer weakness in pretty much all markets we operate in. As a result of these efforts we also improved our operational and financial flexibility allowing us to consider a greater variety of potential growth opportunities that could create significant value for our business and our investors in the years to come.

Century has always focused on domestic and international growth and increasing long-term shareholder value, and that commitment will continue. The pursuit of new Greenfield development is a good example for our commitment to grow. As we demonstrated with a number of casinos that we developed from the ground up, Edmonton being the one that really stands out, we know how to identify promising opportunities and deliver them on time and on budget. Our Century Downs Racetrack and Casino project in Calgary is the next promising and compelling opportunity in our pipeline. We have started construction a few weeks ago and our excitement about this project grows day by day. Century Downs will be only horse race track in Calgary and has a casino with 550 slots as well as food and beverage and entertainment facilities.

The location is just great, adjacent to the successful Crossiron Mills Regional Shopping Mall north of Calgary, on the major highway connecting Calgary and Edmonton. It is ideally positioned to capture the markets of North and North West Calgary, both of which do not have a casino. It’s a great team working on the project, which includes the same construction company that delivered our casino in Edmonton on time and on budget, and we hired a new senior executive whose background includes the position of Director of Racing Operations in two race tracks in Canada and U.S.

Increasing our position as the leader in operating casinos on luxury cruise ships, we have secured five new cruise ship contracts. The first three will commence operations over the next few months but the remaining two will start next year. Another new development opportunity we’re working on is the Hotel Casino project we have applied for in Vienna, Austria. Together with the owners of the Hotel Intercontinental and other strategic Austrian investors including a renowned local restaurant operator, we have applied for license to develop and operate a casino with 25 gaming tables, 318 gaming machines and a variety of entertainment options. The decision of that license is expected towards the end of the second quarter.

In addition we’re evaluating a number of other new development opportunities in North America as well as internationally. We have begun examining the landscape in a handful of countries to establish new relationships and gaining a sense as to whether these markets would be good fit for our Company and our growth strategy. Another opportunity is online gaming and we took a cautious first leg step in this regard. In July of last year we launched an online social gaming site in collaboration with IGT's DoubleDown Casino partner program. Players visiting our web sites can play the same IGT casino games they know anywhere anytime, gaining immediate access to slot games, video poker and black jack, roulette, poker and bingo, always remaining connected to the Century Casinos brand. We will soon begin to advertise promotions and product offerings of our casinos to online players, who also have the opportunity to purchase points for extended time to play.

Acquisitions are another way to pursue future growth, and while we find the landscape of potential acquisitions in North America to be more limited now than in the past, we always keep our eyes open. We look for targets that have the potential to be immediately accretive to our earnings and we aim not to pay more than around six times the EBITDA we think the casino can generate. But expanding in new markets through new developments or acquisitions is just one phase of our growth strategy. Focusing on organic growth is our other top priority. From an organic standpoint we still see many opportunities to innovate, evolve and expand our businesses.

Throughout 2013 we spent $4.7 million of 4.5% of our revenues on a major slot system upgrade to allow for download, loss credit and promotional table games chips in Colorado. On restaurant and bar renovations, a new hotel room and hallway artwork in Canada and on converting cash slots to ticket in-ticket out in Poland. Some of these improvements has a negative certain impact on revenues but as most of you know we are thinking long term.

So as you can see we made great strides in 2013, executing on our strategy to strengthen our company and we have a compelling portfolio of growth opportunities that we believe will pay out for our shareholders. Our future as a Company is bright. We remain optimistic about our directions and our ability to continue increasing long term shareholder value.

I will now review the results of our individual operations for the fourth quarter 2013 in comparison to the same period a year ago. The Century Casinos Hotel in Edmonton showed in local currency 5% revenue growth. EBITDA increased by 7% resulting in a solid EBITDA margin of 33%. It was kind of a mix bag for the revenues of this property with slots down slightly but tables as well as hotel and F&B up. This is our largest property with 759 gaming machines and 35 gaming tables.

During the quarter we upgraded the lighting concept in the showroom, renovated the Mid-City Grill restaurant and smartened up the hotel rooms and hallways with nice outlook. We will continue to market and grow The Players Cup Loyalty Program and to market the showroom with life entertainment as well as our Yuk Yuk's Comedy Club. The first quarter of 2014 started out flattish in local currency and we think that it’s going to be the trend for the rest of the year. In Calgary the revenue decline was the same as in the third quarter, 14%. Gaming revenue decreased primarily -- decreased in Baccarat action.

We’re still struggling to overcome the disadvantageous location without spending too much on marketing and promotions. We operate about 11% of all slots in the Greater Calgary market with our market share of slot revenue almost between 5% and 6% only. On the gaming tables we managed to get between 7% and 8% of the market but knowing that there are seven casinos competing in the Calgary market that’s only about half of our fair share.

We focus on growing table gains revenue and we continue to market the two floors that we have to third-party promoters as well to companies for dinners, functions and conferences. Effective April 1st, the Alberta Gaming and Liquor Commission announced extended opening hours for table games and we intend to take advantage of that.

In Colorado net revenues of the Century Casinos and Hotel in Central City and the Century Casino & Hotel in Cripple Creek were down 9% and 3% respectively, which is pretty much in line with most other regional U.S. gaming markets. Within the respected markets both properties could actually increase their shares likely.

As mentioned, already we upgraded the slot system at both Colorado casinos and we will enroll our new gold-capped rewards program shortly. Expect to see continuing slight weakness in the Colorado gaming market. On top of this as you might have read in the news, various proposed alert measures have been submitted by Colorado race tracks for the operations of gaming machines which, if they would make it develop and pass could materially hurt revenues of all existing casinos in Colorado. In the past, all such efforts has been soundly defeated and the Colorado Gaming Association led by the large casino company Black Hawk is already working on counter-measures for this potential threat.

The 14 casinos we operate and manage on cruise ships and in Aruba had lower revenues but EBITDA increased by 27%. As announced previously, we will open three new ship-based casinos in the next quarter including one luxury cruise ferry out of Portland, Maine. In addition, we already two more under contract, scheduled to open in the first half of next year.

Finally, you look at our European operations. While revenues at our casinos in Poland were flat, EBITDA net earnings declined. Casinos Poland operates nine casinos. Most are located in four and five star hotels in major cities throughout the country. In the fourth quarter, we opened a second casino in the Marriott Hotel Complex in Warsaw. The entrance to this new venue is next to Warsaw’s main train station and close to a popular shopping mall providing for substantial pedestrian traffic direct in front of the new casino location. After a slow start, attendance and results are increasing month-by-month. Some of our smaller casinos in Poland are still performing behind expectations and are not yet contributing positively to the bottom-line. We are evaluating the market potential for these small operations and may decide to relocate one or two casinos, which may trigger one-time costs and expenses.

For example next month, we will relocate the casino in Portland [ph] from a poor performing property to one of the best hotels in town. The accelerated depreciation of the old location has been included in the results of Q3 and Q4. Besides the relocation of the casino in Portland [ph] we are also focusing on expanding existing casino floors and adding new slot machines to make the gaming floors more attractive.

Currently about 70% of the gaming revenue in Poland comes from table games with roulette being the most popular game, 30% comes from the slots. As per current gaming regulations, all gaming machines operating outside of casinos in bars or pubs or slotter gates, have to seize operation by the end of 2015. This is obviously a great long-term opportunity for the licensed casinos and with our market share of approximately 45%, we should be well positioned to capture a substantial part of it.

Casinos Poland is somewhat in a transitional stage. The organization as such as well as the individual operations are being streamlined and bit more effective and efficient. This is a process that will take another few quarters and will cause fluctuating results mostly on the cost side. By then the currently unstable situation in neighboring Ukraine should also have passed and from 2015 on we will be in a great position to realize the full potential of this investment.

That completes the review of the performance of our operations in the fourth quarter. For the entire year 2013 on a consolidated base, we increased net operating revenue by 46%. Adjusted EBITDA grew 20% and net earnings grew 51%. We have a strong financial profile, room for third operational improvements and very promising new projects under development.

In conclusion, we are excited about the path we have laid out for our company. With that I thank you for your attention and open the floor to questions. Operator, go ahead please.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen at this time, we will conduct the question-and-answer session. (Operator Instructions) Our first question comes from Bryan Maher from Craig-Hallum Capital Group. Please state your question.

Bryan Maher - Craig-Hallum Capital Group

A question on Poland. Do you think as you work through the operational and management location challenges that you are working on, that you can maintain flat to increasing margins throughout 2014 and what is your outlook with respect to margins and where do you think margins can ultimately go in ‘15 and ‘16 once you've accomplished what you want to in that market?

Peter Hoetzinger

Currently, the EBITDA margins, if I take the entire year of 2013, is below 10%, in the 8% range actually. And ultimately after we are at, like few quarters down the road, we believe that we able to approximately double-dip and then grow from there. Until then it will be fluctuating as I mentioned mostly on the cost side because of the number of non-recurring measures that we have to implement.

Bryan Maher - Craig-Hallum Capital Group

What does it roughly cost when you go and you move a location, like you’re doing Portland [ph], which I think the grand opening is not this weekend but next weekend. What does it cost to do that?

Peter Hoetzinger

Firstly the cost of accelerated depreciation of an old location -- for example if we count -- use some of the investment that we have made into the old location and/or lease agreement is still continuing, so there's some cost with the closure of that location, and then with the new location. But we are talking a few hundred thousand dollars, half of million or so in that neighborhood.

Bryan Maher - Craig-Hallum Capital Group

And do you find that there are a good number of locations for you to move underperforming Portland [ph] assets to and do you typically keep it within the city that the existing property is already located?

Peter Hoetzinger

Within the city, yes.

Bryan Maher - Craig-Hallum Capital Group

Would there be an instance whereby the new host hotel, in anticipation of you bringing them more traffic would give you favorable terms to relocate one of the casinos in a market to that property?

Peter Hoetzinger

Not really, no. That’s not a significant area now.

Bryan Maher - Craig-Hallum Capital Group

And then lastly the Calgary Casino, do you have a targeted opening date for that yet?

Peter Hoetzinger

Not a firm date. It’s either -- probably first quarter. There is a chance for December this year but if you’re modeling the first quarter it’s probably [indiscernible].

Operator

(Operator Instructions) And it appears there are no further questions at this time. We just got another follow up question from Bryan Maher.

Bryan Maher - Craig-Hallum Capital Group

I have a couple of quick follow ups. In Colorado could you walk through that again, that potential threat to that market that you were talking about that has been previously shot down?

Peter Hoetzinger

Can you repeat the question please?

Bryan Maher - Craig-Hallum Capital Group

In Colorado casinos...

Peter Hoetzinger

Yes? I'm trying to figure out what your question is?

Bryan Maher - Craig-Hallum Capital Group

Peter discussed some potential threats in the Colorado market. Can you elaborate on that a little bit?

Erwin Haitzmann

There is a group that owns the only interesting existing rate hike in Colorado and Arapahoe County and they are putting -- this is the one that is the real threat. They are putting a ballot measure -- to commit large casinos actually in three locations. And it seems that they are committed to put lot of money at that effort and so the industry -- the existing casino industry is working on fighting against that and we’ll in all likelihood also put up a significant amount of money. As you know in the past all these efforts has been soundly defeated often times with margins of 80% against. We should hope that the same is the case this time but it will ask for money from the operators to contribute to the effort to fight it off.

Bryan Maher - Craig-Hallum Capital Group

And would that be for the ballot for this year, 2014?

Erwin Haitzmann

Yes, for this year.

Bryan Maher - Craig-Hallum Capital Group

And would the money they’d be asking for be kind of pro rata to the size and gross gaming revenues that each of the properties probably makes?

Peter Hoetzinger

It doesn’t look like this. It’s -- a maturity of the money will come from the large casinos in Black Hawk and it’s not an obligation. It’s more what is each casino willing to put in. So we will not be obliged to put in a certain amount and which, particularly figuring out what we think is the correct contribution for us both from the Colorado side and for Central City. To give you a dimension, the industry talks about anywhere between $18 million and $20 million for the campaign to fight it off. We hear that proponents of that Arapahoe County rates are kind of putting $30 million in. It is expected that all casino operators as a whole will contribute 0.5 million with regard to the central city operators. It’s still open but not too much is expected and as I said the majority is expected to come from the Black Hawk operators.

Bryan Maher - Craig-Hallum Capital Group

Thanks for that. And Peter, you talked a little bit in your comments about acquisition opportunities, not only in North American but internationally. Can you kind of prioritize what’s more important to Century and where you’re seeing more opportunities and may be give us a little bit of color as it relates to -- Caesars announced that they’re closing down the Harrah's and Tunica last week and I’m surprised that they would not have even tried to have sold that for some amount of money and then also it seems like there is an increasing amount of activity in New York State. Can you elaborate on what you are thinking about some of those markets and in particular international?

Peter Hoetzinger

I was surprised a little bit to this announcement of Australia. We think that for exhibitions in the U.S., the prices are a little bit high for our taste. It’s a little bit better in Canada. So we will lookout for some project there. But we really do love new Greenfield developments. And if we can find some of those, that would be our preference. International, we look at we look at South America and we look at Southeast Asia. In Europe, we’ve already announced that the project we’re working on in Vienna, Austria. So yes, we’re not ruling out any market as long as it’s well regulated and the demographics are right. There's lot of potential out there, new companies legalizing casinos, countries issuing more licenses. Vietnam is very interesting. They are in the process of allowing locals into casinos. So there is lots of stuffs out there to be analyzed and looked at.

Bryan Maher - Craig-Hallum Capital Group

And lastly that seems to be a bit of affinity for you, your stock, your management, the opportunities that you are pursuing. Assuming the market continues to look favorably on Century Casinos as a stock and the potential to maybe utilize that as some currency for an acquisition, what would be the sweet spot currently of an acquisition that you would be looking at in millions?

Peter Hoetzinger

If the target has a solid performance record and if you can find the right debt-equity mix, then the total size of the acquisition could be around $100 million, up to around $100 million.

Operator

And our next question comes from John McGrath with [indiscernible]. Please state your question.

Unidentified Analyst

I was just hoping to get an update on where we are in terms of getting a license in Vienna?

Peter Hoetzinger

For this particular license, there's a total of four applicants. We have one of the four. The Minister of Finance responsible for the decision has indicated that they want to make a decision towards the end of the second quarter. So we are talking June and maximum July of this year. And we believe that is a range month June, July will be holding even though they have already postponed it once. But we believe that towards end of June, we should be hearing from them.

Operator

(Operator Instructions) Our next question comes from Justin Ruissi with Sidoti. Please state your question.

Justin Ruissi - Sidoti

I just have a concern. If there are four other applicants or four total, I believe for this Vienna license, the worst case scenario, if they were to partner or if they were to disseminate this license to another operator, I don’t expect you to enhance any kind of other plans but are there other options or back up plans in the mix that you could possibly aim for attack?

Peter Hoetzinger

No, that is -- each applicant has look forward its own location. Its own ownership and management structure is all very different and separate project and applications, and there is no way to materially change any of the applications between the time you have submitted your application and the time of decision.

Justin Ruissi - Sidoti

Okay, the application that you’re putting and you feel pretty confident that -- if the Ministry of Finance will do move forward with it, they would go with Century?

Peter Hoetzinger

The other three are also strong applications and I think the best really we can say is that we have a 25% chance.

Operator

(Operator Instructions) And it appears there are no further questions. I will turn the call back over to Mr. Hoetzinger for any additional or closing -- we just had a follow-up question from Bryan Maher with Craig-Hallum.

Bryan Maher - Craig-Hallum Capital Group

Can you give us a little bit more color on the land lease agreement with United Horsemen that we’re seeing in the 10-K. You’ve touched upon it briefly, but how should we be looking at that with respect to the obligation and who owns the land, who will ultimately own the land et cetera?

Peter Hoetzinger

The land is owned by a local real estate company. United Horseman has a long-term lease. That’s a 30-year lease, and after 10 years we have an option to purchase the land at that market value.

Bryan Maher - Craig-Hallum Capital Group

But you are required to show the lease obligation of $18 million on your balance sheet, correct?

Erwin Haitzmann

Yes.

Peter Hoetzinger

Yes. Sorry, can you come in here, and how is that exactly structured, and for how many years do we show that lease agreement on the balance sheet?

Margaret Stapleton

Okay. So what this turned out to be under U.S. GAAP was a failed sale leaseback due to the option to purchase the land. So due to valuation process, we actually have the land on the books and the financing arrangement -- both them at $19 million. And those sit on the books until we determine whether we purchase the land or not. If we don’t then we unwind both of those. So basically the lease will run through the financials as interest expense.

Bryan Maher - Craig-Hallum Capital Group

Okay, should we consider that when we value the Company then as kind of a non-EBITDA generating asset as kind of a direct offset to the financing obligation that’s been shown?

Margaret Stapleton

Exactly.

Bryan Maher - Craig-Hallum Capital Group

Okay, I just don’t want to see it degrade the price target analysis section because of this accounting maneuver.

Margaret Stapleton

Right.

Operator

And it appears there are no further questions. Mr. Hoetzinger, I will turn the conference back over to you for any additional or closing remarks.

Peter Hoetzinger

Thank you and thanks everybody for your interest in Century Casinos and your participation in the call. For a recording of the call please visit the Financial Results section of our website at cnty.com. Thank you.

Operator

This does conclude today’s conference call. Thank you for attending.

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